Читать книгу Pricing Insurance Risk - Stephen J. Mildenhall - Страница 17

Insurers must allocate a portfolio price and margin to its constituent units to sell policies and run their business. Price allocation is the topic of Part III.

We examine how units contribute to portfolio risk. For example, the models may show several outcomes that lead to insolvency. Which units are the drivers of losses in those scenarios? Parallel questions can be asked of other, less catastrophic, levels of loss.

Having computed technical premiums as distorted expected values, we can then apply the same distorted probabilities to unit losses, based on their co-occurrence with the total portfolio losses, to allocate the premiums to units. This technique provides a high degree of consistency and synchronization in calculating technical premiums by unit.

There is a particular approach to handling business unit performance assessment and reinsurance decision making that makes use of a capital measure, typically VaR or TVaR, but appears not to make use of a pricing metric. This approach is rooted in return on risk-adjusted capital style financial logic. It takes two steps: allocate capital and then assign a cost of capital hurdle rate that every unit must meet on its allocated capital. All decisions, such as reinsurance purchases, use the same cost of capital as a benchmark.

Practitioners recognize that this approach tends to place uncomfortably large burdens on catastrophe exposed units relative to units that do not participate much in solvency threatening events. In addition, when applied to reinsurance purchasing, it tends to favor, almost without exception, deals that operate at high levels of loss with low probabilities. We show that the problem here stems from the implicit use of what we call the Constant Cost of Capital (CCoC) SRM. The overall hurdle rate for the entire portfolio may not be appropriate for every unit. What is needed is a pricing risk measure—different from CCoC—that responds to varying levels of riskiness with different required rates of return. Whereas Part II discusses the construction of such measures, Part III discusses how to deploy them.